Renting vs Buying A Home (When You're A High Earner)

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0:41Now just$199. Plus, get up to 45 % off select major appliances to keep dishes, clothes, and food fresh. Having fun in the sun is easy with us in your corner. Our best lineup is here at Lowe's. Valid for 527. While supplies last, selection varies by location. See associate or lowes.com for details. Hey, Smart Money listener. We're off today for Memorial Day, but we'll be back on Thursday with a brand new episode. In the meantime, we're going to play you an episode that we think you'll enjoy from Your Next Dollar, the brand new podcast from Nerv Wallet Wealth Partners. Enjoy. Today on Your Next Dollar, we're diving into one of the biggest decisions that you can make with your money.

1:21Should you rent a home or should you buy a home? And making this decision based on emotion rather than math can have significant financial consequences over time. Now, many people approach this question with a gut feeling. They feel as though they should be buying a home and renting is throwing money away. But today we're going to break this down and show you step by step exactly how to think about this question for your financial situation. Because sometimes it's going to make sense to buy a house based on some of the lifestyle decisions you want to make. And sometimes it's going to make sense to rent based on certain circumstances.

1:57Welcome to Your Next Dollar, powered by NerdWallet Wealth Partners, the show where we help you make smarter decisions with the money you already have so you can build the life you actually want. I'm Andrew Jancola. Let's dive in.

2:15Today on Your Next Dollar, we're diving into one of the biggest financial decisions you can make. should you buy a house or should you rent a home? And making this decision based on emotion rather than math could have significant financial consequences over your lifetime. So let's break down this buy versus rent question. Should you buy a house or should you rent a house? Now, many people go out and they compare their mortgage payment to a rent check. And that's okay in some situations. But for the most part, there is a number of different costs that come into play when you own a house versus when you are renting.

2:49And renting looks simple on the surface. Many times we look at how much we are paying in rent every single month. Maybe you have some renter's insurance in place and you have some utilities. And so you know roughly what those fixed costs are. But buying looks simple too until something like a roof goes out, maybe the HVAC goes out, or you have some$15 ,000 bill that you did not plan for. And there's an emotional pull towards homeownership. A lot of people feel as though homeownership is part of the American dream. This is something that you need to make sure that you are doing. And maybe your parents are telling you that.

3:21Maybe your grandparents are telling you that because that's what worked during their generation. But the fix here is total cost of ownership. This means accounting for every single dollar that flows out of your pocket as a result of owning. So we need to understand what the additional costs associated with owning a home is. This is the framework that we're going to use today. Now, first, let's dive in to the pros and cons of renting. And if nobody's ever told you this before, I want to be the first one to tell you. There is nothing wrong with renting. Renting in some situations can actually make more sense than buying.

3:58In fact, in 22 out of the 100 largest metros, owning costs at least 50 % more per month than renting when you factor in things like utilities, fees, and taxes. And there are cities like Bridgeport, New York, and Providence that have gaps of 67 to 76%. So if you live in a big city, this is something to definitely factor. All of our listeners in Seattle or Chicago or the Dallas area, we want to make sure that we are running the numbers before we dive deeper. Now, the break-even point for a lot of homebuyers is right around five to seven years, and this is according to Richify. And so this is something where we want to make sure that we are looking at that break-even point as homeowners to ensure that if we are staying longer, maybe it makes sense to rent or maybe it makes sense to buy.

4:46Now let's look at the pros and cons of renting. First, some of the pros. So flexibility is going to be the biggest one for most folks out there. Maybe as a high earner, you have to move for a job. A lot of high earners get promotions, and so maybe you have to move across the country. Well, you have that flexibility if you are renting, or maybe you want to move for a relationship or a lifestyle change. All of these are great reasons to consider renting because you have some additional flexibility. Secondly, is your capital stays liquid. So you can rent and invest the difference instead of having these large down payments or having these large amounts of money that you have to put up when you buy a house.

5:21And there are predictable short-term costs. This is something where, hey, you are paying your rent, you are paying your renter's insurance, and maybe you have those fixed utilities. And so you have predictable costs on a monthly basis. and in high cost of living areas, folks in New York City, folks in Chicago, folks over in Seattle or LA, you definitely wanna run these calculations because in a lot of those cities right now at the time we're recording this, it makes a lot more sense to rent than it does to buy. But what are some of the cons when it comes to renting? Well, one, you're not building equity.

5:54Equity is not part of this equation. And so this is one thing that a lot of folks will argue is that renting is throwing money away. You're not building equity in your home. Two is rents can increase. Many landlords will increase rents on average about 3 % every single year, and some can increase it by even more. And this is something that you cannot control. And so because you don't have control, some people don't love that part of the equation. And then there is no ability to truly customize your space. If you want to renovate a kitchen or you want to redo a bathroom, this isn't something that you can do while you're renting.

6:28And so this is some of the cons that we can think through when renting. But the pros are really something that may outweigh the cons for your situation, and we'll talk through that step by step. But let's look at homeownership, because homeownership has been a big part of the American dream for decades. And for a lot of folks in the millennial generation or in their 30s and 40s, you may feel as though homeownership has been more difficult to attain. But for high earners out there, this is something where we need to make sure we do the math as the prices of homes increase. So here's some interesting stats.

6:59The Department of Housing and Urban Development reports that homeowners held on average$274 ,000 in home equity in 2025. And so home equity buildup is a big pro when we think about buying a house. And 71.5 % of renters say they would prefer to own a home according to the New York Federal Reserve. So what are some of the pros of owning a home versus some of the cons? Well, one, you're building equity with every single payment. So a portion of your mortgage payment is going to go towards equity. You're going to build up that equity, and you can do a number of different things with that equity. Maybe you want to utilize it for a HELOC.

7:37Maybe you want to utilize it to just have on play to increase your net worth. But this is something that you can absolutely utilize. Two is that the fixed rate mortgage can provide stability. So when you have this fixed rate mortgage, you at least know what your mortgage payment is going to be over the course of the next 30 years. It's locked in unless you refinance or do something else. But we have a lot of other variable costs when we own a home that we need to factor in. Three is if you love customizing spaces. Maybe you want to renovate a kitchen. Maybe you want to redo the floors in your house.

8:07Maybe you want to put some shiplap on your walls. Well, all those different things can be customized when you own your home. And there are some tax advantages that are out there based on some of your situations. But there's also some cons to owning a home. This American dream isn't always all it's chalked up to be. The upfront costs can be significant when you own a home. You've got down payment, you've got closing costs, and other costs associated with owning a home. And let's get real. When you buy a house and you wanna move into a new space, a lot of folks who buy that home also wanna customize that space.

8:41So there may be some bathrooms you wanna renovate. There may be some additional things that you wanna do. There's gonna be some new decor that you wanna buy. And so the upfront costs when we buy a house can be significant. Secondly is you are responsible for everything when it breaks. If your HVAC breaks, if your roof goes bad, you're responsible for all those different things. You can't just call up your landlord and get taken care of. And the breakeven timeline is real. If you're not going to stay in that property long term, five to seven years is on average the breakeven timeline across the country.

9:11And so you want to make sure that that is something that you also factor in. So what do we do about all this? How do we think through the buy versus rent calculation so that we understand what is the best move for our specific financial situation. Well, I'm going to introduce you to something called total cost of ownership. Now, many times I call this TCO for short, but total cost of ownership is something that you're going to hear a lot here on your next dollar. Why? Because it is so important to run this on the big financial decisions. Some people out there have never run total cost of ownership on the biggest purchase that they have ever made, which is their home.

9:49If you buy an RV, you need to run total cost of ownership. If you buy a boat, you need to run total cost of ownership. If you buy a car, you need to run total cost of ownership. And if you buy a home, you especially need to run total cost of ownership. So how do we do this? I'm going to show you step by step right now. So step number one is to set your holding period. So how long do you actually plan on staying in this home? This is one of these single most important variables when it comes to figuring out should I buy or should I rent? And the math looks completely different if you're going to stay for one to two years or if you're going to stay for five to seven years.

10:26My personal rule is I need to stay in that location for at least 10 years. Why? Because if the housing market takes a dip or it goes down, I want to make sure I have enough time to ride out that storm. And so when I look at this, 10 years is my personal minimum. You have to figure out what the personal minimum is going to be for you specifically. But this is a big deal when it comes down to rent versus buy. Because if you're going to live in a location for one to two years and that property's value goes down, you could be underwater on a home. And if you have to move for a job or you have to move for something else, then we have a real problem here.

11:02So we got to make sure we know what our holding period is going to be and figure out the parameters around that. If you cannot commit to that timeline, then maybe you should consider renting. All right, step two is we want to calculate our upfront costs. Now, this is an area many people miss when they run the numbers on buy versus rent. So the first thing you want to look at is your down payment. Well, how much are you going to be putting down? You could put down 5%, 10%, 15%, 20%. How much are you planning to put down? Because for high earners, if you are going to buy a house that costs$400 ,000, this can be something where if you put 9 % down on a down payment, it would cost you$40 ,000 upfront just in the down payment.

11:41Then in addition, we have closing costs. Now, closing costs can range. They can range anywhere from two to 6 % depending on who your lender is and what types of things you are getting on this house. And so when we look at closing costs, this is a very important metric that we need to factor in. Two to 6 % is a big deal when it comes to the price of a home. And for high earners, if you're buying something like a million dollar home. Well, two to six percent can really be a huge chunk of change. Next, we want to think through some of the additional costs associated with buying a home. So a home inspection, that is going to be something that's going to cost you a few thousand dollars, depending on how large the home is.

12:20Initial repairs and some of the initial maintenance that you want to do to a home. Maybe you want to renovate some spaces. Maybe you want to renovate that bathroom or redo the floors. Those are all going to be costs that we need to factor in. Also, we need to factor in moving expenses because this is something that can cost more and more as time goes on. And if you have a large house to move into, this can also cost you thousands of dollars. So we want to add up all of these initial costs so that we understand what the upfront costs are going to be. If you're buying something like a million dollar home, we could be looking at over a hundred thousand dollars in upfront costs alone.

12:55And so we want to make sure that we run the numbers on this before we make our decision. Step three is to calculate ongoing costs. And this is where a lot of people's math completely breaks down. The mortgage payment is just one line item. It is not everything where too many people only factor in the mortgage payment. So you need to add in a number of other things. Number one is mortgage principal and interest. So that is going to be a big part of your mortgage payment that you need to think through. But property taxes are another big thing that you need to think through. Now, there could be an argument made that you are paying your landlord's property taxes when you are renting.

13:28But property taxes are something that you need to look up before you buy a home. Look at your local county or your city's website, and you can look up property taxes there. Then home insurance is the next factor. We want to consider always having home insurance on our homes so that we can ensure that we are risk averse when it comes to some of the things that could happen to a home. And then PMI. So if you put less than 20 % down, you're going to have to pay something called private mortgage insurance. And when we look at PMI, we want to make sure that we understand what that number is going to be.

13:59Then if you're moving into a location that has HOA fees, that's the next thing we want to make sure that we are factoring in. And then annual maintenance. This is the one that I see too many people miss out on. So for repairs, we want to budget at least 1 % of the home's value every single year. And then you're going to start to factor in and figure out, well, what is this actual number going to be every single year? It's different for every home. It depends on the age and what is going on with the home, but we wanna make sure we have at least 1 % budgeted into that value. Then we gotta factor in things like landscaping and home security and things like utilities.

14:32So all of these costs are associated with buying a home. So let's think about this for a second. We have a bunch of upfront closing costs, plus we have a bunch of these ongoing maintenance costs. So we need to understand what that's gonna be. Now, step four is we also need to calculate future costs. Homes break and there are big ticket items that are going to go out at some point in time. We in the real estate industry call these capital expenditures, but these are just the big items on your home. Things like a roof replacement, for example. On average, roofs can go bad every 25 to 30 years, depending on what type of roof that you have.

15:05And it can be very costly to replace a roof. So we need to set money aside for that. Or things like the HVAC going bad. Maybe you have heat where you live, or maybe you have air conditioning where you live. That can go bad every few years as well. Or maybe you want to do kitchen or bathroom renovations. That's a big deal. The water heater goes out. some of these big ticket items all need to be factored in and you need to set savings aside. So one thing I like to do is just automatically save into a specific savings bucket in my high yield savings account to make sure I have enough money set aside for that.

15:36Now, step five, and this is another one that a lot of people miss out on, is closing costs. When you sell, there are costs associated with also selling your home that some people don't factor in. There are things like real estate agent commissions, where you can pay anywhere from two to 6 % for an agent to sell your home. There are capital gains taxes depending on how long you've owned that home. And if you've lived in that home over the course of the last two to five years, then we have things like staging costs and we have pre-sale repairs and all these other costs associated with selling a home.

16:07So you want to make sure that you think through those exit costs as well. When you're doing this calculation, then we want to calculate opportunity costs. Now, opportunity cost is going to be the number that most people don't run when they go and buy a home. But every dollar you put towards your down payment and closing costs is a dollar that you are for going for something else. So maybe you wanted to invest those dollars. Maybe you wanted to put them towards things that you actually value. Step seven is we want to run the rent side for comparison. So we want to understand, well, all of these costs associated with buying a home, what would it cost in my area for the home that I am looking at to rent a home?

16:40And so we're going to look at the costs associated with the average rent. And we're going to look at some of the insurances and maybe utilities factored in as well. Now, step eight is to compare the totals and make the call. So now you have the real number for both paths for the same time horizon. And the goal is not to prove renting versus buying. The goal is to see exactly which path makes sense for your specific situation in your specific market. And so you want to factor in value just beyond the math. So stability, flexibility, roots, family, all those different things are truly gonna matter when you're thinking through this.

17:14But run this calculation before you make any decision because it's very important to run total cost of ownership so you know what the math says. And you have a foundation to then make a decision based on your own lifestyle and flexibility. Now, here is something we wanna factor in though, is the lifestyle factor. We wanna understand exactly what are some of the reasons out there on why we would buy a home even if the numbers don't make complete sense for our personal situation, because sometimes there are reasons to buy a home that are different from just financial reasons. In fact, I would personally argue that buying a home is actually a lifestyle decision, not just a financial decision.

17:52And so some reasons why people choose to buy instead of rent, even when the numbers don't make sense, is they want to put down roots. If you have a family and you want to put down roots in a specific location, that may be one of the reasons why you want to buy. Or their community is in that location and they know, hey, they grew up in this location or they have a strong community sense there. Well, that's another great reason to look into buying a home that is not financial. Or maybe they just want to have pride of ownership. Maybe owning a home is what they want to do and that's what you truly value.

18:20Well, if you truly value it, there's nothing wrong with buying a home as long as it fits within your financial parameters and your specific financial situation. Or they want stability for their family. And this can be a great reason to buy a home, to have stability in that location. Maybe there's a great school district in that area that you want your kids to go to. And so you are doing it for family and lifestyle reasons. And then obviously, there's legacy and generational wealth. Maybe you want to hand that home down to your kids one day, or maybe you want to hand it down to someone else. And so that is a reason why you want to buy a home.

18:51Now, let's go into some of the reasons people may choose to rent. Well, one is for that career flexibility. And you as a high earner, if you are working on building up your career, and maybe you have to move from city to city as you get promotions, this could be one great reason. Or maybe you're looking at life stage and you're single or you're a newly married couple or you don't have kids yet. And so you don't want to plant those roots just yet. Or maybe it's just not part of your lifestyle priorities. You want to spend more time traveling. You want to spend more time doing things that you love and that flexibility is going to really matter.

19:19And then there's the market reality. The location that you live in is going to be a big factor when it comes to buying gross rent. When you live in New York City, it is much harder to buy a house than if you live in the middle of Alabama. And so this is going to be something that really does matter long term when it comes to making this decision. So the framework for making this decision is first, let's start with the numbers. Run the numbers so you have a baseline to go off of. And then look at your lifestyle questions and ask yourself a couple of these questions. How long do I actually plan to stay in this location?

19:51And does stability matter more to us right now than flexibility? And what does ownership mean for us long term? What are some of the things that we want to make sure that we are focusing on? and then weigh both sides together. This is the way that you can make a financially educated decision, but also prioritize lifestyle if that is more important to you. There is no universal right answer, but in reality, you do need to run the numbers so you know what you're working with. So that is how we think about buy versus rent. I hope this was helpful. I hope you took this step-by-step so you understand what to do next if you are thinking through this process.

20:25Now, let's dive into some of our favorite videos that we saw this week. Sometimes it can actually be a better financial decision to rent than to own Let me explain because a lot of people listening are going this guy just said the sky's green. This makes no sense Let me give you an example. I've lived in san francisco new york la three very expensive cities Sure in each of those cities. It was cheaper for me to rent than to own when I lived a few blocks from here Let's say that my rent was three thousand dollars a month. I kept a very close eye on the market there was a building right next to me.

20:57Same square footage, same view, same number of bathrooms and bedrooms. It would have cost$6 ,400 a month to own when I factored in all the phantom costs, taxes, interest, maintenance, opportunity costs. So I didn't want to own. I didn't want the maintenance. I just said, I'm going to keep renting. I took the difference and I invested it and I made way more than I ever would have made owning. So what's my message? It's that you need to run the numbers on the biggest purchase of your life and you should never feel guilty about renting this is the perfect video for exactly what we're talking about today and larger cities will typically have numbers in favor of renting now not always but you're going to see this if you do live in a larger city and i love that he went in there and did the math where he looked at his situation and said okay i could rent a home right now for two thousand dollars or i could go out and buy a home, but all the additional costs associated with buying a home after I run the numbers are going to cost me about$6 ,000.

21:56So instead, he decided what was best for his situation was to rent and then to invest the difference. And so that is something that you can do based on what we talked about today. We took you through the steps on how to figure out how much you would be spending if you actually bought a house versus how much you'd be spending if you rented a home. And so you can do that calculation and see if it works in your certain situation. Now, if you decide to rent, one of the things that you will notice is the more you talk about this with friends and the more you talk about this with family, you may get a little pushback from folks.

22:30Because many people in the United States think that you need to buy a home, especially as a high earner. You may get some additional peer pressure from folks saying, hey, you make good money. Go out and buy yourself a house. Plant some roots. Get some equity. Renting is throwing money away. But again, we want to make sure that we are running the numbers so we can make the best financial decision for our own situation If you don't get in the game of homeownership and you rent in your 20s and you rent in your 30s You're gonna turn around in your 40s and having not built any net worth. Am I not better off renting and investing in the stock market Versus buying a house.